Neutral. August has been the worst DJIA, S&P 500 and NASDAQ month of the year since 1988. However, August’s track record in election years since 1950 (DJIA & S&P 500) or 1971 (NASDAQ) is much better. Average election year August performance ranges from 0.7% by DJIA to 3.3% for Russell 2000 (since 1979). This election year could be different since the pandemic has changed the date and structure of the conventions which have historically taken place in July.
Near frothy. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors are at 57.3%. Correction advisors stand at 25.2% while Bearish advisors stand at 17.5%. Overall sentiment is hovering right around levels seen near recent highs going back to late 2018. Sentiment has often lingered at elevated bullish levels for varying lengths of time before any meaningful retreat occurs. As long as the major indexes hold up, sentiment is likely to remain bullish.
Improving. Yes, improving. Q2 GDP advance estimate showed a decrease of 32.9%, but this was considerably better than early June projections 40-50% decreases. This was the worst quarterly decline on record. For reference the worst quarter during the financial crisis of 2008-2009 was less than a third of that. Because of that massive decline and a clear desire not to fully shut down again, the worst is most likely in the rearview mirror. Weekly jobless claims are also well off their peak, although they have picked up slightly and remain above 1 million as many areas of the economy remain closed or are taking steps backwards. The low bar for corporate earnings also appears to be overly pessimistic.
Divergent? NASDAQ trading at new all-time highs. S&P 500 positive year-to-date and DJIA is trailing both. This divide is also in the overall economy and is likely to persist until the pandemic fades into history. All three indexes are bullishly above their respective 50- and 200-day moving averages. NASDAQ and S&P 500 are strongest with their 50-day moving averages above their 200-day moving averages. Previous highs are likely to prove formidable resistance for DJIA and S&P 500. NASDAQ’s concerns are earnings, guidance and valuation.
0 – 0.25%. At its meeting earlier this week the Fed attempted to be cautiously optimistic. They noted activity has picked up since the lows but remains below pre-pandemic levels. They also pointed out a fair amount of uncertainty exists and that the “path of the economy will depend significantly on the course of the virus.” Nothing truly shocking. To alleviate some of this uncertainty, the Fed further committed to do everything in its power to support the recovery.